Withholding Requirements for Sale of California Real Estate
Real estate withholding is a prepayment of income (or franchise) tax due from sellers or transferors on the gain from the sale of California real property. It is not an additional tax on the sale of real estate.
Real estate withholding is required whenever there is a transfer of title on California real property. Examples are:
- Sales or transfers of real property (including exchanges and gifts).
- Short sales.
- Personal property sold with real property (if not stated separately).
- Deferred exchanges.
- Vacant land.
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An installment sale is a sale of property where you receive at least one payment after the tax year of the sale.
We require buyers to withhold on the principal portion received in escrow and each installment payment made to the seller when buying California real estate on an installment basis. Statute requires withholding on each installment payment to match the withholding credit to the income the seller reports on their income tax return.
We do not require withholding:
- If other exemptions apply, see Form 593-C, Real Estate Withholding Certificate.
- On the installment payments interest portion.
How to calculate installment payment withholding
You can calculate the withholding amount with either the Total Sales Price Method or using the Optional Gain on Sale Election certified on Form 593, Real Estate Withholding Tax Statement.
Total Sales Price Method
Withhold 3-1/3 percent on each installment payment’s principal portion.
Example 1: Initial payment due during escrow
- Total sales price is $300,000.
- Down payment $150,000.
- Withhold $4,995 ($150,000 x .0333 = $4,995).
- Remit $4,995 at close of escrow to us.
Example 2: Subsequent payments after escrow
- Monthly principal payments are $2,000.
- Withhold $67 ($2,000 x .0333 = $66.60).
- Remit $67 to us.
- Send the seller $1,933 ($2,000 - $67) plus interest.
Withholding Amount Using Optional Gain on Sale Election
Withhold the Optional Gain on Sale withholding percent on each installment payment’s principal portion.
Example: Subsequent payments after escrow
- A non-Californian partnership has a withholding rate of 12.3%.
- The non-Californian partnership pays the seller $1,500 monthly principal payments.
- The withholding is $185 ($1,500 x 0.123 = $184.50).
- Remit $185 to us.
- The seller receives $1,315 ($1,500 - $184.50) principal payment plus interest
- 12.3 percent for individuals, trusts and non-California partnerships
- 8.84 percent for corporations
- 10.84 percent for banks and financial corporations
- 13.8 percent for S corporations
- 15.8 percent for financial S corporations
- Complete and sign Form 593-I, Real Estate Withholding Installment Sale Acknowledgement.
- Calculate the withholding amount with the Form 593 instructions.
- Withhold on the required first installment payment you receive in escrow.
- Submit to the Real Estate Escrow Person (REEP):
- Form 593-I.
- Copy of the promissory note.
- Amount you withheld. The REEP sends it to us.
Form 593-I must include:
- Principal amount.
- Installment amount.
- Interest rate.
- The repayment period’s length.
Continue to withhold on all subsequent installment payments. Before you send the seller each payment, you must:
- Calculate the withholding amount with the Form 593 instructions.
- Send it to us with Form 593 and Form 593-V, Payment Voucher for Real Estate Withholding, by the 20th day of the month that follows the month you pay the installment.
- Send the seller a copy of Form 593 by the 20th day of the month that follows the month you pay the installment.
If sending your last installment payment, write “Final Installment Payment” on the bottom of Form 593.
Write to us any time the following items change:
- Installment sale’s or promissory notes terms
- Payment schedule.
Real Estate Escrow Persons information
- The complete, original, Form 593-I.
- A copy of the promissory note.
- The seller’s or transferor’s certified Form 593.
- Form 593-V with first installment payment’s withholding amount.
After the buyer sends you the:
- Form 593-I
- Promissory note
- Amount withheld
The Real Estate Escrow Person must keep copies of these forms in their records.
- File the appropriate California tax return.
- Report the installment sale income.
- Claim the related withholding credit in each taxable year that you receive installment payments.
Elect out of subsequent installment payment withholding
Sellers or transferors can elect to not report the sale on the installment method. If you choose not to use the installment method, you generally report the entire gain in the year of sale, even though you do not receive all the sale proceeds in that year. To do this, you must:
- File a California tax return and report the entire gain on Schedule D-1, Sale of Business Property.
- Submit to us a written request to release the buyer from withholding on subsequent installment payments after filing your tax return and reporting the entire gain.
- We approve or deny the request within 30 days from when we receive it. The buyer must continue to withhold until we approve the request.
See FTB 4010, Withholding on California Real Estate Installment Sales, for additional information.
See the table below for available methods to calculate withholding.
|Total sales price method - a withholding of 3-1/3% of the total sales price.||To calculate withholding using the Total Sales Price method, multiply the total sales price by 3-1/3%. (.0333)||
|Alternative withholding calculation method - withholding on gain of the sale amount by the percentage that applies to you.||To calculate withholding using the Alternative Withholding Calculation method, also known as the Optional Gain on Sale Election method, multiply the estimated gain by the seller’s or transferor’s maximum tax rate.
Real estate withholding is required on a trust unless the trust can qualify for an exemption on Form 593-C.
There are two types of trusts; a grantor and a non-grantor trust.
A grantor trust is a trust where the grantor (the person who transferred property into the trust) retains the right to cancel or revoke the trust. For tax purposes, a grantor trust is disregarded and the grantor (usually an individual) must report a real estate sale and claim the withholding on their individual tax return. Typically family trusts and living trusts are grantor trusts.
Withholding is required on a grantor trust unless the grantor qualifies for an exemption. Complete Form 593 using the individual's (grantor’) information.
A non-grantor trust is an entity separate from the grantor for all tax purposes. The seller is the trust and withholding is required. Complete Form 593 using the name of the trust and the trust's FEIN. Do not use the trustee’s individual information.
If the trust distributes the income from the gain on the sale of real estate, the trust must file Form 592, Resident and Nonresident Withholding Statement, to allocate the related withholding credit to the beneficiary.
- Form 593 – Real Estate Withholding Tax Statement
- Form 593 Booklet – Real Estate Withholding Booklet
- Forms 593-C and 593-E with instructions – Real Estate Withholding Certificate and Computation of Estimated Gain or Loss
- Form 593-I – Real Estate Withholding Installment Sale Acknowledgement
- Form 593-V – Payment Voucher for Real Estate Withholding
- Electronic Filing Information for Resident, Nonresident, and Real Estate Withholding Agents
- Electronic Funds Transfer (EFT) for Banks and Corporations
- FTB 761RE – Top Ten Real Estate withholding Errors
- FTB 936 – Nonwage Withholding Audit Process
- FTB 1023R – Real Estate Withholding Electronic Submission Requirements
- FTB 1150 – Withholding at Source Penalty Information
- FTB 4010 – Withholding on California Real Estate Installment Sales
- FTB 4098 – Withholding Information Notice
- FTB 4827 – Withholding Voluntary Compliance Program Application
- Exhibit A - Withholding Liability Calculation Sample
- FTB 7429 – Do I need to Withhold on This Trust?
- FTB 7429 LLC – Real Estate Withholding Sales by Limited Liability
- FTB Pub. 923 – SWIFT Guide for Resident, Nonresident, and Real Estate Withholding
- FTB Pub. 1016 – Real Estate Withholding Guidelines
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